What will become of vacant houses?

More and more, even lenders don't want foreclosed properties.

More and more, even lenders don't want foreclosed properties.

March 05, 2009|JEFF PARROTT Tribune Staff Writer

Mortgage lenders and servicing companies are increasingly discovering they don't want anything to do with dilapidated properties they're foreclosing on, say local lawyers who represent struggling borrowers. It's an odd situation that not only is leaving borrowers in limbo but could also worsen South Bend's vacant and abandoned house problem. Joseph Zielinski, an attorney at Indiana Legal Services Inc. who works exclusively on foreclosures filed against low-income homeowners, said he is seeing more mortgage lenders and servicers dismissing foreclosure suits after they have inspected properties and discovered their poor condition and low value. At the same time, the firms are refusing to modify loans. More also are declining to proceed with the sheriff's sale despite having obtained a foreclosure judgment in court. Many houses are in such poor shape, and are surrounded by similar houses, that the mortgage servicers know they won't be able to sell them for much money, Zielinski said. They also don't want to pay to maintain the properties, under threat of city code violations, while they sit on the market. Sheriff's Department and court records appear to bear out this trend. Mortgage lenders and servicers filed 2,187 foreclosure cases last year in St. Joseph County courts, compared with 2,186 cases filed the year before -- a number that was virtually unchanged. But the number of properties "sold" or reacquired by lenders at sheriff's sale fell by 38 percent, from 1,944 properties to 1,190 properties. And the discrepancy can't be explained away by the rise last year in bankruptcy filings, which can allow borrowers to ward off foreclosure. The number of Chapter 13 bankruptcies, the kind debtors file to prevent foreclosure, rose 39 percent from 2007 to 2008, or from 138 to 192 cases, according to U.S. bankruptcy court records. But those 54 additional bankruptcy cases didn't come close to accounting for the 754 fewer properties sold or reacquired at sheriff's sale. Zielinski and Judy Fox, director of the Notre Dame Legal Aid Clinic, said they recently discussed the problem in a conference call with legal aid attorneys from other states. "This is being seen throughout the country," Fox said. "Once a property is foreclosed, the homeowner is in a very bad spot. She or he cannot sell the property because of the cloud on the title, the bank won't accept payment and the homeowner lives in constant stress, wondering when they will be evicted. No one has ever had to deal with this, so lawyers are only now trying to craft solutions." Homeowner option? Fox said she is now advising some clients facing foreclosure -- particularly those in South Bend's blighted neighborhoods -- to stay in their homes even after a foreclosure judgment has been entered in court. She notes that these people should try to line up other housing that they could quickly move into, should the mortgage company suddenly change its mind. Zielinski said he has not yet started giving such advice, "because you don't know what the lender will do." But he estimates that 40 percent to 50 percent of lenders are now declining to take back houses at sheriff's sale. Fox and Zielinski said many borrowers do the seemingly logical thing and move out when the court process starts. But because they can't afford attorneys to represent them in their foreclosure cases, they never realize it when the mortgage company withdraws their property from the sheriff's sale. Months later, they are shocked to receive notices from the city that they owe money for code violations as the weeds grow or people start dumping trash on the lots. If the sheriff's sale never occurs, the foreclosed-upon borrower is still the property's legal owner until it sells at a county property tax-delinquency sale, the attorneys said. "I advise them to pay attention to what is going on," Fox said. "If you do move out, make sure you know that you're responsible for that house if it doesn't sell." Daniel Mosteller, litigation counsel for the Durham, N.C.-based Center for Responsible Lending, said the new phenomenon seems to be growing around the country, and it has the nonprofit consumer advocacy group worried. "It's something that we as an organization are looking into," Mosteller said. "There still hasn't been much in the news media about it." Mosteller said lenders and servicers might be trying to protect themselves from lawsuits like the one filed in February 2008 by the city of Buffalo, N.Y. Buffalo is suing a group of 38 lenders to recover its costs in maintaining and demolishing houses that were abandoned after the companies foreclosed on borrowers. The case is still pending in court. "I do think this is a problem we're going to be seeing more of," Mosteller said, "and a problem that's just going to hang over these homeowners for years."Staff writer Jeff Parrott: jparrott@sbtinfo.com (574) 235-6320